Published Fri, 14 Aug 2020 12:05:55 on Income Investors
Warren Buffett Has Started Buying This Top Dividend Stock; Here’s Why
After years of window shopping, Warren Buffett has finally found a top dividend stock to buy.
At the end of July, Buffett’s firm Berkshire Hathaway Inc. (NYSE: BRK.B) disclosed that it had recently invested an additional $1.7 billion into Bank of America Corp (NYSE: BAC). Those purchases brought Buffett’s total ownership stake in the financial goliath to more than $24.0 billion. That stake now equates to roughly 11.8% of the entire business. (Source: “Warren Buffett Adds to His Bank of America Buying Spree, Bringing Stake to 11.8%,” CNBC, July 31, 2020.)
So why bring this up?
First, Buffett’s move signals that he’s still bullish on the U.S. economy. The COVID-19 pandemic has triggered a wave of financial panics, business disruptions, and corporate bankruptcies. But like all crises in the past, the country will get through this one too. And for those with some cash on the sidelines, the current downturn presents a once-in-a-generation opportunity to scoop up wonderful businesses on the cheap.
Furthermore, banks, as evident by Buffett’s recent purchases, represent the best way to invest in any business rebound.
Sure, COVID-19 has taken a big bite out of their earnings for the next quarter or two. But institutions like Citigroup Inc (NYSE: C), Goldman Sachs Group Inc (NYSE: GS), and JP Morgan Chase & Co. (NYSE: JPM) serve as the “financial toll roads” of the U.S. economy. They earn a profit every time people make, save, or spend money. So when more businesses reopen in the coming months, these companies stand to start making beaucoup bucks once again.
And Bank of America Corp appears to have positioned itself best of all.
Since the 2008 financial crisis, Bank of America management has slashed costs, beefed up reserves, and tightened lending standards. This has given the bank plenty of wiggle room to navigate the current downturn.
Cost-cutting efforts could also pad the bottom line once we emerge from this recession. The company has done a bang-up job at controlling non-interest expenses over the past five years: closing physical branches, automating routine processes, and emphasizing digital banking.
In 2014, for example, management spent $0.88 in overhead on every dollar generated in revenue. Today they have to spend less than $0.60. (Source: “Bank of America 2Q20 Financial Results,” Bank of America Corp, July 16, 2020.)
Those efforts have had a massive impact on Bank of America’s bottom-line results. Pre-COVID-19, the bank generated an industry-leading return on equity of 15.4%. And in 2019, management returned a jaw-dropping $34.3 billion to shareholders in the form of dividends and stock buybacks. When you own such a profitable operation, it’s not that difficult to make money.
“The banks we own earn between … 12% and 16% or so on net tangible assets,” explained Warren Buffett in a CNBC interview in February. That’s a good business, that’s a fantastic business against the long-term bond at 2%. If you have a choice between a two percent instrument and a 12% instrument, which one is going to win over time?” (Source: “Warren Buffett Says Bank Stocks Are ‘Very Attractive Compared to Most Other Securities I See’,” CNBC, February 24, 2020.)
Shareholders of this top dividend stock, in the meantime, can still lock in a respectable payout. Admittedly, Bank of America Corp has pressed pause on its stock buyback program to conserve cash. But the business still generates more than enough in the way of profits to fund the $0.72-per-share annual dividend. Based on the current share price, that comes out to a yield of almost three percent.
With that in mind, maybe income investors with cash on the sidelines should quit their window shopping.
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|Stock name||Last trade||P/E||Earnings/Share||Dividend/Share||Dividend yield|
|BANK OF AMERICA||29.67||10.6||2.80||0.72||2.45|
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